Draghi is Outright

Nearly a weak after Draghi announced Outright Monetary Transactions (OMT) to help distressed Eurozone countries, we no little of how this “bazooka” will work in practice. We do not know the conditions to which these countries will need to sign up, but more importantly we do not know how the ECB is going to fund the transactions and through which channels is proposes to purchase government bonds.

To be fair Draghi does not really have a choice. To calm markets bold measures are required. As we know being bold normally means being dangerous too. One of the rules in the ECB’s charter forbids the ECB from financing governments. Thus direct purchases would be in direct conflict of the charter. The ECB can buy bonds from third parties on the secondary market without breaking the rule. Many people, including Jens Wiedmann and myself, believe that this does break the rule in spirit, as this is most definitely still government financing which could tarnish the ECB’s independence.

This looks like a good week for Europe. On the whole, pro-European parties have won the elections in the Netherlands, the German constitutional court allows the ESM to be ratified and Draghi has expanded the ECB’s armoury. Yet, what will this week’s permanent status be in history? The Germans will note that many of the monetary safeguards that were agreed upon when Germany decided to join the single currency have crumbled. These safeguards, were there for a reason. Germany will only be pushed so far. This week might well be the start of the loss of both the ECB’s independence and democratic power, and German faith in Europe and the Eurozone.